Oct. 15 (Bloomberg) -- Lawmakers seeking to avoid a default
on U.S. debt are so far getting little pressure from financial
markets, which in the past have provided the impetus to break
fiscal deadlocks.

The Standard & Poor’s 500 Index remained near last month’s
record and Treasuries declined today amid reports that lawmakers
continued to negotiate a deal to raise the debt ceiling two days
before the government’s borrowing authority lapses. Senate
leaders are poised to reach an agreement as early as today,
while House Republicans may seek to block or change any pact.

Congressional leaders probably would have responded more
quickly and held more meetings in recent days had they been
forced to make a deal by financial markets “collapsing,”
according to Representative John Delaney, a Maryland Democrat
and member of the House Financial Services Committee.

“Government seems to need forcing functions,” Delaney
said today in an interview in Bloomberg’s Washington bureau.
“Unfortunately we’ll wait to the last minute because the market
is giving us the flexibility to wait.”

The S&P 500, the benchmark for U.S. stocks, fell 0.7
percent to close at 1,698.06 after rallying 3.3 percent in the
previous four sessions. The Dow Jones Industrial Average
declined 0.9 percent, or 133 points, to 15,168.01. The U.S. 10-year yield rose 0.04 percentage point to 2.73 percent.

Getting Attention

Should the Dow tumble 400 points or more, “that’s going to
get people’s attention, but we don’t need to be there,” said
Representative Jim Renacci, an Ohio Republican who is on the
Ways and Means Committee.

“Markets realize that there’s a deal going on and it’s
being brokered, but at any time of course perception can
overrule reality and, boom, we can have that fall,” Renacci
said today in an interview. “Hopefully that’s not the case.”

“Congress hasn’t felt the market pressure,” said Edward
Lashinski, the Chicago-based director of global strategy for
futures trading at RBC Capital Markets LLC, a primary dealer
that trades government securities directly with the Federal
Reserve. “If investors were much more panicked and fearful, we
might have seen a deal by now. There’s still a belief in the
market that they’re not going to allow a default because
everyone agrees it would be catastrophic.”

Borrowing Room

The federal government is in the 15th day of a partial
shutdown, and on Oct. 17 will run out of room to borrow more
unless Congress acts to raise the debt ceiling, according to
Treasury Secretary Jacob J. Lew.

The 2008 collapse of Lehman Brothers Holdings Inc. provides
a lesson in how a plunge in financial markets can concentrate
the minds of lawmakers.

With markets still tumbling two weeks after Lehman Brothers
filed for bankruptcy, the House of Representatives on Sept. 29,
2008 rejected the George W. Bush administration’s $700 billion
plan to rescue the financial system. The S&P 500 tumbled 8.8
percent that day, the most since the 1987 crash, and the Dow
Jones Industrial Average lost 778 points for its biggest one-day
point drop ever.

Second Try

Four days later, the House passed the rescue plan, designed
to unlock credit markets and safeguard the nation’s banking
system, on a 263-171 vote. The tumble in stocks “served as a
wake-up call,” Democratic Representative John Yarmuth of
Kentucky said at the time.

A plunge like that may not be needed for lawmakers to make
progress, though “it would accelerate the process and call
attention to the fact that they are the problem,” according to
Robert Doll, who helps oversee $117 billion as chief equity
strategist at Chicago-based Nuveen Asset Management LLC. While
investors may believe Congress would not let the U.S. default,
keeping markets calm, a major market loss such as in 2008
“would force them to do something,” Doll said.

“I’m surprised the market has hung in there as well as it
has,” Doll said. “It’s sort of a double dare. Markets assume
they won’t default, and maybe the politicians assume they don’t
have to do anything until the market says we have a problem.”

The $12 trillion of outstanding marketable government debt
is 23 times the $517 billion Lehman owed when it filed for
bankruptcy on Sept. 15, 2008. The U.S. stock market lost almost
half its value in the five months following Lehman’s failure.

2011 Bill

In 2011, the S&P 500 tumbled 7.3 percent in the 18 trading
day period that ended when President Barack Obama signed a
compromise bill to raise the U.S. debt limit by at least $2.1
trillion. He signed the bill on the day the Treasury warned U.S.
borrowing authority would expire.

Now, market reactions help offer lawmakers political cover
to back down from their hard-line stances, said Tony Fratto, a
U.S. Treasury assistant secretary in the George W. Bush
administration and founder of Hamilton Place Strategies, a
Washington-based consulting firm for financial companies.

“That just makes it easier from a political standpoint to
make that case back home,” he said. “Absent a big external
shock, you’re just faced with the reality of going home with
your tail between your legs and admitting that you lost.”

Big, Noticeable

Failure by Congress to reach a deal before Oct. 17 may be
enough to trigger the market reaction needed to jolt lawmakers
into an agreement, he said. “It’s got to be big and significant
and noticeable” he said.

Senator John McCain, an Arizona Republican, said lawmakers
will realize the impact of a failure to raise the debt limit
when markets plunge.

“Watch the markets,” McCain said in an interview last
week. “That’s the arbiter of all of this. I think the markets
are going to go down as soon as we default. That’s what people
on Wall Street tell me.”

Daily S&P 500 swings have averaged 0.78 percent so far this
month, down from 0.9 percent for Octobers over the last eight
decades and less than a quarter the moves in 1929, 1987 and
2008, data compiled by Bloomberg show.

“Markets have gotten a bit inured to what’s going on” in
Congress, said Brian Jacobsen, who helps oversee $226 billion as
chief portfolio strategist at Wells Fargo Advantage Funds in
Menomonee Falls, Wisconsin. “When push comes to shove, they’ll
make a deal in the last minute.”

Meeting Obligations

Markets may be calmed by investors who believe that the
government can meet its obligations beyond the Oct. 17 deadline,
and that lawmakers are certain to forge some sort of extension
before triggering a default, according to Joseph Carson,
director of global economic research at New York-based
AllianceBernstein LP, which has $445 billion in assets.

“The markets are already priced to some type of resolution
whether in six weeks or six months,” Carson said. “If the
market was going to enforce some discipline on politics, then
bond yields wouldn’t be under 3 percent.”

The U.S. won’t default even if Congress and Obama fail to
reach a deal to increase the debt limit, Republican Senator Tom
Coburn of Oklahoma said in an interview last week.